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Personal Loan Vs Car Loan: Pros & Cons

When you’re
looking for a new car, you should always think about whether you need finance
to buy it and what sort of finance you should go for. While looking at the pros
and cons of a personal loan vs car loan, you should look at the amount you can
borrow as well as the interest rates and any fees involved.

Deciding between a personal loan and a car loan

You can use a
personal loan or a dedicated secured car loan to finance your new (or used)
car. You should look at your needs and your future finances, as well as the
type of car you’re looking at. No matter which route you choose, though, you
need to go over the terms and conditions of each loan carefully.

Before you start your search, ask yourself these questions

Is your financial
situation likely to change? If you’re expecting a pay rise or promotion in the
next year or so, you may be better with a car loan. If you’re not so sure your
finances will be great, a personal loan won’t use your car as collateral so it
can’t be repossessed if you get into difficulty.

Do you have a car in mind?

If you have a
target and you know how much you should be paying for it, then you’re in a good
position for negotiation. A good move is to have pre-approval from a lender so
that you don’t waste time looking at expensive cars you might be turned down
for.

Is the car new or used?

Used cars are
cheaper, of course, but then if the car is too old or has too many miles on the
clock then you may not be able to get a car loan. In these circumstances, it
might be best to apply for a personal loan.

How’s your credit rating?

If you have
less–than–brilliant credit, you might find getting a personal loan harder, so
having the car act as collateral in a car loan is a wise move.

Of course, you
have to spend some time looking at and comparing your options. It’s a good idea
to use a loan calculator and look at the comparison
rates to work out how much your loan will cost you each month and how much
it’ll cost in total.

While lenders and
products vary slightly, personal loans and car loans tend to have some of the
same core features.

Personal loans

Personal loans are
more flexible than car loans. You can find them online or in–branch and you can
find cheap personal loans without having to use the car as collateral.

Personal loans are often unsecured

With unsecured
loans, lenders are relying on your credit history and financial status to see
how risky you are to lend to. However, because they’re unsecured (no
collateral), you may face higher interest rates than you’d get with a car loan.

They’re easy to apply for

Because there’s
no need for collateral, you won’t have such a long application process. You
just explain what you want the funds for when you make your application.

You can use the loan for lots of things

You can use personal loans for most reasonable things so when you use one to buy a car, you can also spend it on accessories and modifications for your vehicle, as well as tax and insurance.

Whereas a car
loan might not let you borrow that much.

Car loans

A car loan covers
the cost of buying a car, as well as registering and licensing it. You can get
your loan from your bank, an online lender or a dealership.

Car loans have better interest rates

You can find
cheap car loans because the loan is secured by the vehicle itself, which
makes for better interest rates.

The application process is longer

You need to
provide more information on a car loan application—the make, model and
condition of the car—so the lender can value it. Most lenders will give you
pre–approval for a certain amount so you have time to find a suitable car.

There are more restrictions

You can only use
the car loan to buy a car. Some lenders will cover the cost of taxes as well,
but if you’re buying a used car, there may be mileage and age limits on the
cars you can choose.

How to find the right loan

Use a comparison site to find lenders and note down the loans you like the look of and
that you’ll qualify for. Pay attention to the term and the comparison rate –
which tells you the total cost of the loans by combining the interest rate and
the fees into one percentage cost.

Look at the
features of the loans and find out what are the ongoing fees, or establishment
fees? Is there a big penalty for early repayment? It’s things like this that
can decide between your final two or three shortlisted candidates.

Pick out which
loan is cheapest to service and which meets your needs the most. Don’t have a
shortlist of more than two or three lenders or loans.

Make the
application and wait for the decision. Many lenders have a pre–approval service
so you can see if you’ll be accepted and what you’ll pay even before you apply.

Your choice here
can affect your finances for quite a few years, so don’t rush into anything.
Make sure you understand the terms and consequences of the decisions you make
and if there’s anything you’re unsure of, talk to the lender before committing
to anything.

You can research
and compare personal
loans and car loans from Australia’s banks, credit unions and other lenders
at InfoChoice.The
information contained on this web site is general in nature and does not take
into account your personal situation. You should consider whether the
information is appropriate to your needs, and where appropriate, seek
professional advice from a financial adviser. If you or someone you know is in
financial stress, contact the National Debt Helpline on 1800 007 007.

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